Amazon Looms Over Rackspace Sale

It’s not easy competing with Amazon in the cloud, as Rackspace has learned. A month ago, Rackspace announced that it had retained Morgan Stanley after having “been approached by multiple parties who have expressed interest in a strategic relationship with Rackspace, ranging from partnership to acquisition.”

Although Rackspace could attract many parties attempting to expand cloud and data center offerings, like Dell, EMC, Hewlett-Packard, IBM, Cisco and CenturyLink, one banker’s impression was that no buyer had enough incentive for an acquisition to justify issuing a public statement about a potential sale. “Nobody wants to buy something that competes face to face with Amazon,” he said.

The problem is that Amazon dominates cloud services and is pushing others to the wayside. Two weeks ago, Gartner named Amazon Web Services the clear leader in its 2014 Magic Quadrant for infrastructure-as-a-service, followed by Microsoft’s Azure. The market research firm demoted Computer Sciences Corp from a leader and bumped Rackspace from its list of “visionaries,” companies that have roadmaps for becoming major forces. Gartner determined no companies were strong enough for its “challenger” ranking.

Rackspace issued an SEC filing about retaining Morgan Stanley because of significant stock declines in the past year, speculated a second banker. “The company’s under pressure because investors unfairly think it competes head to head with Amazon” but according to the banker, only 20% of Rackspace’s sales are in direct competition with the book retailer’s cloud services. Rackspace also sells traditional data center services. Business customers lease space in these data centers to store their servers and other networking equipment. Additionally, Rackspace provides IT services to its data center customers.

Both bankers wondered about Rackspace’s mention of the possibility of forming partnerships in its exploration of alternatives. It was unusual terminology to use in a statement about exploring alternatives, the second banker said, and might indicate that alliances are more logical and easier to achieve than a takeout.